Latest Analysis

In the first in a series of articles analysing the most recent reporting output of the Pension Fund Perceptions Programme, James Tew assesses how pension funds perceive their managers in terms of delivery against objectives

The recovery in peripheral government bonds in 2013 vindicated those pension funds that held on to their holdings through the euro crisis – explaining the notably better 2013 returns of the likes of ABP, which had not sold the periphery, over its counterparts that had done so.

Getting a lot of GIPS

European fund managers are striving to become compliant with performance presentation standards, according to the second annual PricewaterhouseCoopers (PwC) Performance Measurement Survey. All firms responding to the 1999 survey indicated that they intend to become compliant with one of the main performance presentation standards in the short term.The most dramatic finding of the survey is the fact that Global Investment Performance Standards (GIPS) look set to overtake the performance presentation standards of the Association of Investment Management and Research (AIMR-PPS). In the 1999 survey, 70% said that they were heading towards compliance with GIPS, or the local equivalent, up from 53% the previous year. By contrast, only 8% of firms said that they were heading for compliance with AIMR-PPS, down from 19% in 1998. The marked rise in interest in GIPS may be due to the fact these standards were issued more recently, in spring 1999, and some countries, such as the UK, Germany and Switzerland, have since issued local versions. In fact, 16% of survey respondents said that they were seeking compliance with other standards, such as SPPS in Switzerland and DVFA in Germany, that are related to GIPS. AIMR-PPS standards were conceived in 1987, and have been through a process of clarification since. Despite the fact that AIMR-PPS has longevity on its side, GIPS is definitely on the ascendant, with 76% of respondents expecting that GIPS or the local equivalent will supersede AIMR-PPS within the next two years.PwC does point out that while GIPS is taking Europe by storm, AIMR-PPS has penetrated the US investment management market, with 74% of respondents to a similar survey conducted there replying that they were AIMR-PPS compliant.Firms perceived a two-fold benefit in becoming compliant with presentation standards: not only is compliance a marketing advantage with clients and consultants, according to around 60% of respondents, but the same percentage of respondents replied that it also provides good internal control.The survey also reveals that meeting the demands of compliance has proved to be more complicated – and costly – than many firms originally imagined. The percentage of fully compliant firms rose by only 2% in 1999, to 27%, up from 25% the previous year. This is despite the fact that in 1998, 62% of respondents anticipated that they would be fully compliant within 12 months. Nonetheless, firms remain positive – in 1999, 67% again projected that they will have achieved full compliance within the next year.While the costs of implementation of performance presentation standards are high – 43% of survey respondents estimated the annual cost of becoming compliant at more than $100,000 (E100,000) – the maintenance costs are substantially lower, with 65% of the firms responding that those costs can be kept below $50,000 a year.Automated systems can keep running costs down, and both package systems and customised solutions are available. The systems used focus on account-level calculations (84%) and client reporting (57%).However, other functions are also common: composite calculations (43%) and arbitration analysis at the stock level (43%). Bespoke systems are used by 59% of respondents, while 11% are using packages, such as Hi Portfolio, STATPRO, SAMS and Socrates. UK firms also make use of third-party providers, such as WM, CAPS and Frank Russell. European firms are using bespoke systems to a much greater extent than US firms: only 30% of US firms said that they were using in-house, bespoke systems. This may reflect fundamental differences between the European and US investment management markets.In looking at the number of composites (groups of accounts managed in a similar style), 54% of respondents to the European survey said that they have more than 250 discretionary accounts and 31% have more than 50 composites. In the US market, only 34% had more than 250 accounts and only 11% had more than 50 composites. According to PwC, the differences between the US and European markets may be accounted for by the fact that European firms have a broader base of currency mandates; in addition, the US market historically has been more product-oriented than the European.For all performance presentation standards, it is up to each firm to construct its own definitions of composites, but the survey indicates that several consistent trends are emerging. The majority of firms that have non-fee-paying accounts (such as the firm’s own pension account) do not include them in their composites. PwC notes that if a non-fee-paying account is included in a composite, then the percentage it represents within the composite should be disclosed. In addition, few firms include segments of balanced accounts in their non-balanced composites: 76% of respondents indicated that they do not carve out segments of balanced accounts for inclusion in non-balanced composites, against 59% in 1998.Firms are also speeding up the time taken to include new accounts in composites for calculation purposes: 65% included new accounts within the first full month under management, against 31% the previous year. This may reflect the growing popularity of GIPS, which will require inclusion in the first full month. AIMR-PPS is more flexible, and in the US, where it predominates, around half the firms waited until the first full quarter.